High Court Explains Law On Year Of Taxability Of Interest On Income-tax Refunds

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M. Jaffer Saheb (Decd.) vs. CIT (Andhra Pradesh High Court)

Interest u/s 244A is not taxable in the year of grant of refund but has to be spread over the respective AYs to which it relates

In AY 1982-1983 the AO raised a demand which the assessee paid. In AY 1990-91 (16.06.1989) the AO gave effect to the Tribunal’s order and refunded the tax paid by the assessee together with interest for the period from 30.10.1985 to 31.08.1989. The AO held that the said interest was assessable to tax in AY 1990-1991 while the assessee claimed that the said interest had to be spread over and assessed in AYs 1985-1986 to 1988-1989. The CIT(A) upheld the claim of the assessee though the Tribunal upheld the stand of the AO. On appeal by the assessee to the High Court HELD allowing the appeal:

The stand of the department that interest u/s 244(1A) accrues to the assessee only when it is granted to the assessee along with refund order issued u/s 240 is not correct. Interest accrues on a day to day basis on the excess amount paid by the assessee. The entitlement of interest is a right conferred by the statute and it does not depend on the order for the refund being made. An order for the refund is only consequential order which in law is required to be made more in the nature of complying with the procedural requirement, but the right to claim interest of the assessee is statutory right conferred by the Act. Accordingly, the interest has to be spread over and taxed in the respective years (K. Devayani Amma 328 ITR 10 (Ker) dissented from)

Note: The Govt has paid interest of Rs. 37,365 crore in 4 FYs. The practical consequence is that interest for years which are beyond reopening cannot be taxed. Also consider the impact on Avada Trading 100 ITD 131 (Mum) (SB) where it was held that s. 244A interest granted u/s 143(1)(a) was taxable in the year of receipt and could not be deferred to year of finality u/s 143(3). See also Sandvik Asia 133 ITD 126 (Pune) (TM) where it was held that interest received cannot be set-off against interest paid

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